President Obama in his State of the Union speech laid out a number of tax proposals that would encourage manufacturing in this country. The President proposed expanding the current Domestic Production Deduction (Section 199) and doubling it for advanced manufacturing technologies (from 9% to 18%). In addition, particularly relevant is the President's call for making the Research and Development (R&D) tax credit permanent and continuing 100% expensing for another year. The President's proposal.
All good things — although I would note that defining advanced manufacturing technologies will not be a walk in the park. I am amazed every day talking to clients that are doing incredible cutting edge work in run-of-the-mill type industries (ex. welding, machinery).
I wake up every day working to help manufacturers in this country and while the President's proposals in this area are certainly good news – unfortunately given the current political climate it is unlikely for a number of reasons that these proposals will be enacted this year. This is the case even though the proposals enjoy support from both sides of the aisle. However, it is particularly heartening to have the President speak on behalf of manufacturing given that one of his own former economic advisors
has questioned the importance of manufacturing for our economy.
Manufacturers Not Taking Advantage of Tax Breaks – Buy the Lottery Ticket
It is disheartening that the President's speech only served to remind me that the simple reality is a huge number of businesses – especially small and medium businesses – aren't taking advantage of the benefits for manufacturing already included in the tax code. It reminds me of the old joke of the fellow who prays every day for the Almighty to help him win the lottery and finally after days of praying the clouds part and God says: “Saul, work with me, buy a lottery ticket.” Manufacturers who complain about high taxes are too often not even buying the lottery.
Domestic Production Deduction (Section 199)
The biggest problem here is that small and medium manufacturers are not taking it (although that is changing in recent years as the deduction has reached the 9% level) and even more likely are not taking full advantage of the deduction – leaving too much savings on the cutting room floor.
Industries that can benefit particularly from the Domestic Production Deduction are not only the obvious manufacturers but also construction firms, engineering and architectural firms, software, electricity and gas producers, food and beverage producers and even film and video production.
In addition, the Domestic Production Deduction is a case of one hand giveth the other taketh. It is a favorite for the IRS to audit. So while at the same time companies need to take advantage of the deduction they also need to make sure they are doing it right. Some of the best practices we see are – you cannot do shortcut calculation methods. Keys to avoiding IRS headaches include doing an item-by- item determination of qualified property and applying the appropriate wage and income limitations. One last point, while my shop has had good success defending businesses against IRS examinations of the Domestic Production having proper workpapers and utilizing a proven is a big big help.
Research and Development (R&D) Tax Credit.
Small and medium manufacturers continue by the thousands to overlook the R&D tax credit as a key benefit for them (it is the biggest business tax credit in the code – approaching $9 billiion a year). Manufacturers still think the R&D tax credit is for test tubes and lab coats. Abolish such thinking. Probably more good could be accomplished if we renamed the R&D tax credit. The R&D Tax Credit is plain and simple a tax credit for manufacturing.
Think instead of the R&D credit as an incentive for companies engaged in the design and development of new or improved products, processes, technologies and software. The list of industries
that can benefit from the R&D tax credit is vast. Is your company on it?
I've written earlier about the tax breaks
savings for manufacturers who export – with the odd name of IC-Disc. Again, a hugely underutilized tax benefit for manufacturers – including those who not only export finished products but also manufacturers of component parts that are included in a larger item that is exported (ex. your company makes tires that go on a car that is exported).
The President's proposals are good news for manufacturers hopefully for tomorrow, but for today manufacturers need to take advantage of what's already there.
Dean Zerbe is National Managing Director for alliantgroup since 2008 and former Senior Tax Counsel for the U.S. Senate Finance Committee. Dean is responsible for monitoring tax-related legislative activity in Washington, D.C. to help keep our clients, CPAs, and staff informed on tax issues and to be our voice on Capitol Hill related to issues that impact small and medium-sized businesses. During his tenure as a Senate senior staffer, Dean was intimately involved with almost every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills (representing two of the largest tax cuts in the nation's history); the JOBS bill in 2004 (corporate tax reform); and, the Pension Protection Act.